Private and non-private limited companies
Another type of limited companies is company limited by share capital; it is the typical of profit sharing companies. They are divided into private and non-private companies.
Private company is a company in which Articles of Association comply with S29 of CO, i.e. restricts the right of shares transfer, limits number of members from 1 to 50 and prohibits any invitation to the public to subscribe for any shares or debentures of the company while public company does not subject to these restrictions specified in S29. However, it is required to wider disclosure requirements than a private company and subject to tighter control under the CO.
The restriction on transfer is that the directors have an absolute discretion to refuse to register any transfer of the company’s shares, and they do not have to give their reasons for refusing. Another typical restriction is a pre-emption clause which prohibits the transfer of shares to a non-member, so long as a member can be found to purchase the shares. The restriction on inviting the public, this prevents a private company from using a prospectus or inviting the public to buy its shares. If a private company wants to increase its issued share capital, it is restricted to offering its shares to existing members or privately negotiating with prospective members, i.e. privately placing its shares.
For non-private companies, they must have more than 51 shareholders and they can apply for listing in stock exchange However, they have no possess pre-emption rights to acquire other existing shareholder’s shares and the liabilities of member are limited. After they are listed, they are under the strict control of other regulations such as Securities Ordinance, Listing Rules, and The Hong Kong Code on Takeovers and Mergers, etc.
OBLIGATIONS SET BY THE COMPANY ORDINANCE FOR DIFFERENT TYPES OF COMPANIES
Generally, private companies having a share capital are not required to file their accounts with the Companies Registry in HKSAR.
For the limited public companies, they are required to submit the annual accounts, director’s report for the company must be audited by Hong Kong registered auditors and laid before the shareholders in general meeting within 18 months of incorporation and then at least once in every calendar year. A director’s report must be prepared in conjunction with the annual accounts.
Besides, the limited public companies are required to hold annual general meeting which must be held within 18 months of incorporation and then at least once in every calendar year. The limited public companies are required to submit the annual return which must be filed with the Companies Registry at least once a year (except if there has been no change in the filed particulars since the date of the last annual return, in which case a certificate confirming this fact can be filed in lieu of an annual return).
COMPARISION FOR THE ADVANTAGES AND DISADVANTAGES OF VARIOUS COMPANIES
Main Advantages of Private Limited Company
Limited Liability
Under common law, no person is responsible for anyone else’s debts without agreement to be so bound. It means that people can invest in a business without worrying about losing personal possessions because their liability to the business is limited to the amount they have invested in it.
Legal Entity
Private Limited Companies have a legal position in their own rights and they are not a group of partners. The company is treated as a separate person in law. It means that a company can own property in its own name, not the members. It can enter contracts in its own name and is not affected by a change in shareholders. It can take legal actions against other persons.
Perpetual succession
The corporation exists in its own right. Changes in membership have no effect on the status of the company. It means that it has continuity. Because the company is a separate legal body, it will continue to exist despite a change in its shareholders, i.e. owners. It is said to have perpetual succession it will continue to exist until it is finally wound up and dissolved, and it is not affected by either the death or the bankruptcy of its shareholders.
Finance is easier to obtain than in sole proprietorship or partnership
A company may obtain finance by creating a floating charge, which means that a company can charge all its assets, including its plant, machinery, tools, stocks of goods for sale and money in accounts as security to the bank for a loan granted to the company. However, even those properties have been charged to the bank as security, the company can still buy, sell, replace and otherwise deal with the assets in the normal course of business without getting approval from the bank.
Separation of ownership & management
A company is said to have the characteristic of separation of ownership and management. It means that the shareholders are the owners of the company, while the directors and secretary are the management personnel of the company. As the shareholders only have a limited liability, they can appoint management and business experts to help them to run the business. They can just make contribution to the capital of the company. They are the investors and get dividend payment if the company makes profits.
Filing of accounts
The main advantage of a private company is that it need not file accounts with its annual return and it may also be exempt from the provisions of the Companies Ordinance which are concerned with the content of a company’s accounts.
Main Disadvantages of Private Limited Company
Complex to set-up
Under the Company Ordinance, Limited Companies should have two constitutional documents - the Memorandum of Association and Articles of Association.
Shares cannot be freely transferred or sold without getting consent from other shareholders
Transfer of shares should be agreed by other shareholders and the other shareholders have the pre-emption right to buy the shares.
Main advantages of Public Limited Company
Easy to raise fund
The company can raise more capital because shares of Public Limited Company can be quoted on the Hong Kong Stock Exchange and sold to public.
Limited Liability
Shareholders have limited liability and they are only liable for the amount they contribute only.
Main disadvantages of Public Limited Company
Complex and high set-up fee
Every Public Limited Company should be started from Private Limited Company. After a period of time, when the company meets the requirement of becoming Public Limited Company (e.g. turnover, profitable, history, etc) , it can apply for listing. Before listing, the company should prepare company prospectus and obtain an underwriter. Once all the shares are fully subscribed to, the Stock Exchange Council will allow the company quotes its shares on the stock exchange.
ADVISE ON HOW TO STRUCTURE THE COMPANY TO ALICE AND BENSON
After comparing the advantages and disadvantages of varies companies, in short run, I think that private company will be most suitable for Alice Lau and Benson Cheung to incorporate.
Meeting the investment requirements for Alice Lau’s parents
As Alice’s parents would like to provide funds for expansion and do not wish to participate in the day-to-day running of the business, but they need an income from their investment and they would like to be consulted on major matters of policy. They are advised to invest in the shares issued from the private limited company incorporated by Alice Lau and Benson Cheung. They can appoint the directors to work for them that they do not need to participate in the daily operation of the business.
Besides, they can get dividends for their shares and can have voting power on the decisions of the company. If they only buy the debentures issued by the company, they have no such right to be consulted or have voting power for the decision of the company and they can only get the interest from the debentures. Therefore, buying shares from the private limited company can suits their wants to prefer to make investment but not actively involved in the management of the company as their liabilities and risk in the company is only limited to their investment amount.
Meeting Alice Lau and Benson Cheung’s requirement
Since Alice Lau and her husband would like to retain the control of the business and will own the majority of shares and be directors, the establishment of private limited company can fulfill their requirements. They can own the majority of shares by getting more than 50% of shares and sell the remaining to Alice’s parents as their investment. They can both act as the shareholders and directors that can remain control of the business.
Greater involvement for Mark Lau in the business
Alice’s parents can appoint Mark Lau as one of the directors or appoint him as the General Manager to management the company on behalf of them that he can have greater involvement in the business.
Advantages for the incorporation of a Private Limited Company for Alice & Benson
Restriction on transfer of shares
With the restriction on share transfer, transfer of shares should be agreed by other shareholders and the other shareholders have the pre-emption right to buy the shares and can exclude the outsiders.
Presentation on accounts
It need not file accounts with their annual return (CO S.109(3)) and has partial exemption from publishing its full account.
Cheaper to operate
Unlike the listed public companies, there are high administrative costs for the preparation of annual accounts and director’s report and they are required submit the annual return which must be filed with the Companies Registry at least once a year.
Easier to get finance
It is easier for Alice and Benson to finance if they want to obtain finance from the bank by using the movable assets of the company as a security wants to delegate his authority to some management personnel for them to conduct the business on his behalf.
Less restrictions
Private companies are not permitted to solicit funds from the public, many of the rules which apply to non-private companies, particularly those which are designed to protect public investors do not apply to private companies. Thus, private companies generally have more freedom to regulate their affairs. The relative freedom which private companies have in regulating their affairs, and the resulting cost savings are advantages.
Statement in lieu of prospectus
A private is not required to file a statement in lieu of prospectus prior to allotting any shares “CO” S 41(3). This can be a complicated and expensive document to prepare. Provided that a private company is not a holding company or subsidiary company and provided its shareholders agree, the company can prepare simplified accounts each year. “CO” S141D
Right to change status
In the long run, Alice Lau and Benson Cheung can change the company from private limited company to public limited company if they would like to raise fund from the public. They are not permanently depriving the company of the rights of non-private companies by incorporating it as a private company. This is because a private company can simply be converted into a non-private company later if this becomes necessary to raise funds from public in future. Such conversion merely requires a change to the company’s articles of association in the manner described in “CO” S.30
CONCLUSION
In short run, incorporation of a private limited company is easier for Alice & Benson to manage, easier to get finance and there is no need to prepare the complex document as in the public companies. This can save cost and time in management. Besides, Alice’s parents’ requirements can be fulfilled by buying the shares issued by the private company. In long run, it is possible to raise fund from the public by changing the private limited company to public limited company by changing the company’s articles of association.
http://www.tklo.com.hk/TDBHK.htm
http://www.tklo.com.hk/TDBHK.htm
Vanessa Stott, An Introduction to Hong Kong Business law, 3rd Edition, Longman, 2001
http://www.tklo.com.hk/TDBHK.htm
Vanessa Stott, An Introduction to Hong Kong Business law, 3rd Edition, Longman, 2001
Vanessa Stott, An Introduction to Hong Kong Business law, 3rd Edition, Longman, 2001